Telebras (TBH) & Brazil Message Board

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Strategies & Market Trends : Telebras (TBH) & Brazil

TBH 0.945

-1.1%

Nov 26 3:59 PM EST

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To: David Petty who wrote (11332)	1/8/1999 11:00:00 PM
From: Fernando Saldanha	Read Replies (2) of 22640

This problem with Itamar Franco perhaps turned the attention of investors away from more serious matters. The Central Bank's reserves have fallen to $34.5 billion. This is below the trajectory agreed with the IMF. The agreement stipulated that if reserves would fall below a specified trajectory the Central Bank's ability to sterilize the loss of reserves would be gradually restricted. Beyond a certain point, the Central Bank would be altogether prevented from sterilizing, and would for all practical purposes be functioning as a currency board. In plain English, this means if reserves fall much more the monetary base will contract and interest rates will go up sharply. That would force a devaluation (or, less likely, capital controls). One could ask why did the IMF include such restrictions in the agreement? The reason is probably that they did not want the Central Bank to keep sterilizing reserve losses, i.e., financing capital flight by pumping money into the economy, like the Russians did (the Russians skipped several auctions before their devaluation).

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